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Capital

Market
A market for long term funds
Equity & debt
Domestic & international

Primary Market
A market for new issues
Leads to capital formation
Nature of fund raising
Domestic

equity issues by corporates and FI


debt issues by corporates, government and FI

International

equity issues through GDRs, ADRs


debt issue through ECBs
Other funds from international marketsFDI- in equity and debt form
FII- in the form of portfolio investments
NRI - in the form of short and medium term
deposits

Fund Raising in the Primary


Public issue byMarket
prospectus
Private placement
Rights issues

Primary Issues

Rights Issue
Issue of new shares to existing
shareholders on a
pro-rata basis
To be kept open for at least 30 days and
not more than 60 days
Why rights?
to reward shareholders
to reflect the stocks true worth
to hike promoters stake

Private Placement Market


Direct sale of securities to a few investors
through
merchant bankers.
The investors are selected clients such as FIs,
corporates, banks and HNIs.
Subscription from less than 50 members
Time as well as cost of issue is low
Tailor made issues
Less formalities, disclosures
Popular for placement of Debt instruments

Preferential Allotment
An issue of shares by a listed company to a
select group of persons consisting of
Promoters, Foreign partners, Technical
collaborators, Private equity funds
Need not file offer document.
Three years lock-in period for promoters
Why preferential allotment?
to enhance promoters holding

as part of debt restructuring/conversion of loans


to issue shares by way of ESOPs.
quick fund raising at low cost

Public Issue
Initial Public Offering (IPO)- It is an offering of

either a fresh issue of securities or an offer for


sale of existing securities or both by an
unlisted company for the first time to public.
Follow-on Public Offering(FPO)- It is an

offering of either a fresh issue of securities or


an offer for sale to the public by an already
listed company through an offer document.

Intermediaries to an
Issue
Merchant banker
- should be registered with SEBI
- Act as book running lead manager
- Performs pre-issue and post-issue
activities
Registrars to the issue
- to finalise list of eligible allot tees,
ensure
crediting of shares and dispatch
refund orders
Bankers to the issue
- collection of application amounts
- transfer of this amount to escrow

Free Pricing Regime


Before 1992, Controller of Capital
Issues regulated price
After 1992, the promoter and the
merchant banker decide the pricing

Fixed Price Offerings

Made to uninformed investors

Investors demand not taken into account


An alternative method,

Book Building

A mechanism through which an offer price


for IPOs based on the investors demand is
determined.
Uses investors demand for shares at various
prices

Book-building Process
Basically an auction of shares
Investors can watch the book being built
The company appoints one or more merchant
banker(s) who compulsorily underwrite the
issue.
Company enters into an agreement with stock
exchanges
Book runner appoints stock brokers
Collects information from potential buyer and
attempts to build interest through road shows.
Book runner submits draft Red herring
prospectus to SEBI and Registrar of Companies
(ROC) which contain all the disclosures except

Offer of shares at a specified price band


Public issue shall be kept open for 3 to 10
working days
Bidding process shall be through an
electronically linked transparent bidding facility
provided by stock exchanges
On-line graphical display of demand and bid
prices
Based on the bids, issue price is determined by
issuer
Retail individual investors may bid at cut-off
price
Final prospectus registered with ROC

Allotment of a Book-built Issue


Category-wise % of issue to be allotted on a
proportionate basisNot more than 50% to Qualified Institutional
Buyers
High Net-worth Individuals- atleast15%
Retail Investor-at least 35%
Retail investor who bids in a book built issue
for a value not more than Rs 2,00,000
Allotment and refund shall be made within15
days from the closure of issue.

FDI and FII


FDI- Foreign Direct Investment
an investor which picks up more than 10% stake in a
companys equity.
in the form of fully-owned subsidiary or a joint
venture,
stable, enhances management quality, transfer of
technology and generation of employment.
FII- Foreign Institutional Investment
An institution incorporated outside India as a
pension fund, mutual fund, bank, insurance
company, foreign government agency, foreign
central bank etc.
In the form of portfolio investment
short to medium term investments
can invest only up to 10 percent of capital in a

Foreign Venture Capital


Venture capital is a source of funding for new

entrepreneurs and technology.


FVCI is an investor incorporated/established outside
India who is registered under the SEBI(Foreign
Venture Capital Investor) Regulations, 2000.
Flipkart- Tiger Global, Accel Partners
Myntra- Premji Invest, IDG Ventures India

Private Equity
PE are the investment banks who invest into proven businesses.
Exit strategy is usually the company going public or acquired.
PE funds attract capital from pension funds, insurance funds etc.
All PE from outside India are classified either as FDI, in unlisted
companies, or as FII in listed companies.

Sep 04 2014 : The Economic Times (Delhi)


Providence Set to Exit Idea with 3-Fold Return

ADRs and GDRs


Depository receipts are negotiable instruments denominated
in U.S. dollars or another currency representing a publiclytraded issuers local currency equity shares.
Listed and traded on a foreign stock exchange
represent one or more shares of the issuing company
Indian GDRs are primarily sold to institutional investors
In US GDRs can be issued to qualified institutional buyers but
ADRs can be sold both to institutional and retail investors
ADR listing requires comprehensive disclosures and greater
transparency as compared to GDR listing
GDRs can be converted into ADRs

ECBs
Borrowings raised from international
markets by corporates
Can be raised from any international source
Supplement domestic resources
Low cost of borrowing
Borrower need to manage interest rate risk
and forex risk.

FCCBs

Bonds issued by Indian companies in foreign


currency
Fixed interest/coupon rate paid in foreign
currency
partly or fully convertible into ordinary shares
Interest rates lower than domestic rates
Bonds listed and traded abroad
Exchange risk is more as interest is payable in
foreign currency

IDR
Indian Depository Receipts
Issued by foreign companies for raising equity
funds from Indian market